Legacy Wealth Weekly - June 10, 2016 (Out of Breath)

Penni Johnston-gill - May 10, 2016

After reaching overbought conditions Wednesday (especially the S&P/TSX), equity markets gave back some of their gains such that returns have been down for the week. Talks this week have been much about global bond yields reaching multi-week lows and

Weekly Market Wrap-Up: Out of Breath

After reaching overbought conditions Wednesday (especially the S&P/TSX), equity markets gave back some of their gains such that returns have been down for the week. Talks this week have been much about global bond yields reaching multi-week lows and German bunds flirting with negative yields. The big question is, what is driving this craze into such low yielders? After all, economic performance globally, albeit not spectacular, remains sound. Could it be pure safe-haven demand ahead of the UK referendum, where recent polls show a marked tightening in voters’ intention? Or maybe it is George Soros, who came out of retirement and let the world know that he is selling stocks and buying gold(s)? Whatever the causes, there is a sinking feeling among investors that the bond market knows something that the equity market is unware of. This uneasy feeling has slowed the stock market advance, which is not a bad thing considering the powerful move from February lows (15-20%). For now, gold and gold equities remain the net beneficiary of the decline in real bond yields globally.

Last night, we had the privilege of being a panelist at the 44th forecast dinner of the Montreal CFA Society. This is an interactive event, with guests using remote controls to make forecasts such as where the CDN$ will be a year from now; a) below $70 cents, b) between 70-80 cents or c) above 80 cents. After only 10 seconds, on a huge screen, panelists and guests can see the percentage for each bracket. To our surprise, most of the answers painted a constructive view of global growth and risk assets. Debates were lively among panelists, especially regarding the debt situation globally. As a follow-up, our Chart of the Week provides the recent update from the BIS for households, non-financial corporations and government debt among DMs and EMs. As one can see, a debt deleveraging risk pertains mostly to EM corporates but when China is excluded, leverage looks manageable for now.

Regarding economic data this week, in Canada, full-time employment rose by an impressive 60.5k in May, more than offsetting the decline in part-time employment for a total of 13.8k net new jobs created. Unsurprisingly, employment in natural resources declined 15.9k in May for a total of -37.1k YoY. For their part, construction and manufacturing added 18.6k and 12.2k jobs, thanks to the weak Loonie and a buoyant housing market. Speaking of housing market conditions, the BoC issued a warning on market vulnerability, with Vancouver and Toronto the most likely cities to experience a correction in home prices. In the US, the Fed Labor Market Conditions Index worsened to -4.8 (from -3.4). This is consistent with the weak nonfarm payrolls number issued last week. Also, wholesale inventories increased further, up 0.6% MoM in April which means more destocking to come. In China, the trade balance improved but exports fell 4.1% YoY (from -1.8%) in May. Meanwhile, inflation decelerated to 2.0% (from 2.3%). As such, the PBoC still has room to reflate the economy. In India, the RBI left its policy rate unchanged despite industrial and manufacturing production showing signs of weakness (-0.8% and -3.1% YoY). In Brazil, the Banco Central do Brasil held interest rates steady at 14.25% as inflation remains problematic (9.3%). But in South Korea, the central bank surprised the markets with a 25bps rate cut (to 1.25%) in response to growing pressure to spur growth.

Next week, the Fed is on deck. Otherwise, we await US inflation, retail sales and housing statistics. In China, retail sales and industrial production should help gauge global economic growth and the PBoC.

The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.